The investment call that almost everyone got wrong

It’s government bonds. Long considered sleepy and safe, Treasuries have been largely ignored by investors seeking bigger returns in exchange for greater risk. That’s too bad, because it turns out T-bills have outpaced stocks during the past three decades, which means a lot of investors could have saved themselves a lot of headaches.

Thanks to low inflation, slower economic growth, a rise in savings during the past several years and the Federal Reserve’s decision to keep interest rates low through mid-2013, returns on Treasuries have beaten stocks during the past 30 years. As Bloomberg News reports, that’s the first time that’s happened since the buildup to the Civil War. Bloomberg explains:

Fixed-income investments advanced 6.25 percent, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

“The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

Stocks had risen more than bonds over every 30-year period from 1861 until now, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia.

Why did so many market experts get it so wrong? In part because Americans responded to the recession by saving more. The savings rate tripled to 5.1 percent since the end of 2008, compared with 3.1 percent in the previous decade, Bloomberg reported. As households increase savings, prompted by fears of persistently high unemployment, they are cutting debt and seeking safer investment havens. That’s steered much of the savings into bonds. At the same time, banks are increasing Treasury holdings as they try to rebuild their balance sheet from the financial crisis.